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Fiscal Competition, Convergence and Agglomeration

  • Robert Fenge
  • Maximilian Von Ehrlich
  • Matthias Wrede

This paper analyzes the impact of fiscal competition through infrastructure in a New Economic Geography framework. It is shown that regional competition leads to convergence if the trade costs are high but induces divergence if trade cost have fallen below a certain value. Moreover, fiscal competition yields an overprovision if the trade costs are sizable while it leads to underprovision if the regions are highly integrated. Finally, a trade-off between regional convergence and efficiency arises since the efficient distribution of regional infrastructure requires full agglomeration for sufficiently low trade costs.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-08/cesifo1_wp2084.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2084.

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Date of creation: 2007
Date of revision:
Handle: RePEc:ces:ceswps:_2084
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  1. Kind, H.J. & Knarvik, K.H.M. & Schjelderup, G., 1999. "Competing for Capital in a "Lumpy" World," Papers 7/99, Norwegian School of Economics and Business Administration-.
  2. Fredrik Andersson & Rikard Forslid, 2000. "Tax Competition and Economic Geography," Econometric Society World Congress 2000 Contributed Papers 1356, Econometric Society.
  3. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," Working Papers 9809, Business School - Economics, University of Glasgow.
  4. Sinn, Hans-Werner, 1997. "The selection principle and market failure in systems competition," Journal of Public Economics, Elsevier, vol. 66(2), pages 247-274, November.
  5. Richard Baldwin; Paul Krugman, 2001. "Agglomeration, Integration and Tax Harmonization," IHEID Working Papers 01-2001, Economics Section, The Graduate Institute of International Studies.
  6. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  7. Dupont, Vincent & Martin, Philippe, 2003. "Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic," CEPR Discussion Papers 4107, C.E.P.R. Discussion Papers.
  8. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, June.
  9. Martin, Philippe, 1998. "Public Policies, Regional Inequalities and Growth," CEPR Discussion Papers 1841, C.E.P.R. Discussion Papers.
  10. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  11. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
  12. Martin, Philippe & I.P. Ottaviano, Gianmarco, 1999. "Growing locations: Industry location in a model of endogenous growth," European Economic Review, Elsevier, vol. 43(2), pages 281-302, February.
  13. Borck, Rainald & Pflüger, Michael P., 2004. "Agglomeration and Tax Competition," IZA Discussion Papers 1033, Institute for the Study of Labor (IZA).
  14. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
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